Investors looking for sectoral themes can now bet on manufacturing funds as the new government’s focus on the manufacturing sector will ensure a supportive policy environment. The buzz around the manufacturing sector is driving asset management companies (AMCs) to launch new funds to capitalise on the growth potential of this vital sector.

Mahindra Manulife Mutual Fund, HDFC Mutual Fund and Baroda BNP Paribas Mutual Fund have launched manufacturing funds recently. The new fund offer of Baroda BNP Paribas Manufacturing Fund will close on June 24. In fact, HDFC Mutual Fund Manufacturing Fund raised Rs 9,563 crore, the third-highest collection ever for an NFO and accounts for over 27% of the total equity inflows in mutual funds in May.

Manufacturing funds invest in equity and equity-related securities of companies engaged in manufacturing activities. In the last one year, the existing five manufacturing funds have given returns of over 50%. However, investors must understand that while sectoral funds give high returns they also have high concentration risks.

Buzz on manufacturing

The emphasis on the manufacturing sector by AMCs could be seen as a strategic alignment with current government policies and economic trends. Nirav Karkera, head, Research, Fisdom, says while manufacturing does hold significant growth potential with initiatives like ‘Make in India’ and an emphasis on self-reliance, investors must maintain a diversified approach. “Overconcentration in any one sector can expose investors to higher risks, as seen in past market cycles. While manufacturing funds are appealing, they should be part of a well-rounded investment strategy,” he said.

Similarly, Sonam Srivastava, founder, Wright Research, says AMCs are launching manufacturing funds due to the perceived multi-decade growth potential of the sector. “Factors like rising domestic consumption, increased government support for manufacturing initiatives, and a shift in global supply chains are driving optimism. AMCs see an opportunity to provide investors with targeted exposure to this potentially high-growth segment of the economy,” said Srivastava.

Sectoral funds are cyclical

Due to the cyclical nature of the sector, entry into such funds must be timed based on positioning in the economic cycle, market trends and government policies affecting the sector. Anil Rego, founder, Right Horizons, says, “Cyclical sectors can experience extended periods of underperformance. So, entry should be considered after assessing the valuations. And as exposure to sectoral funds leads to concentration, it is generally riskier in nature.”

These funds are best suited for investors with a strong conviction in the sector’s growth prospects.

Concentration risks

The concentrated nature of manufacturing funds makes them more susceptible to sector-specific downturns, as their performance is closely tied to the health and dynamics of the manufacturing industry. Investing in cyclical sectoral funds like manufacturing demands a thoughtful approach. As these funds are closely linked to economic cycles, their performance will fluctuate with economic conditions. Before investing, it’s essential to assess the current phase of the economic cycle.
Abhishek Banerjee, founder and CEO, Lotusdew Wealth & Investment Advisors, says sectoral funds could be less liquid. “One should look at the holdings of the fund to ensure there is not a lot of off-benchmark exposure or very high concentration to few securities. Also the expense ratio could be higher than a more diversified fund as these are usually priced higher as speciality funds,” he says.

Volatility is a defining characteristic of cyclical sectors, including manufacturing. Investors should brace themselves for frequent market swings and price fluctuations. “Adopting a long-term perspective and having a robust risk management strategy are crucial to navigate through the ups and downs of the market,” says Karkera.

Investors should be aware of this cyclical nature and have a longer-term investment horizon to ride out market fluctuations. It is also crucial to assess the risk tolerance and investment goals before choosing a manufacturing fund. Moreover, thorough research into the fund’s investment strategy and the specific companies it invests in is essential. So, investors with a high-risk appetite and a long-term investment horizon of five years or more may find sectoral funds like manufacturing suitable for their portfolios.

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